Could the earthquakes in Nepal hinder or help penetration of the region?

The two recent earthquakes to hit Nepal have opened the door for increased reinsurance penetration. However, while Nepal’s relatively small insurance market may want to target reinsurers in India with local knowledge, its vulnerability may lead to caution from reinsurers already in the region.

The first earthquake struck on 25 April 2015 with a magnitude of 7.8 on the Richter scale, and brought about significant economic and human losses. Less than three weeks later on 12 May, Nepal was hit with a second quake of a similar scale at 7.3 on the Richter scale.

Though insurance costs will be a fraction of the total economic losses due to low insurance penetration, with a small market primarily built around life lines, the local market will be hit significantly.

In 2013, Nepal’s non-life rates, amounting to $102m, were dominated by motor and property lines. Both of these areas will be hit heavily by the earthquake, with property and infrastructure devastated in the capital city of Kathmandu, and large motor insurance claims being predicted due to extensive damages to vehicles in the area.

A.M. Best Asia-Pacific associate director analytics Jeff Yeung highlighted the need for better cat modelling in the region, but said risk management should not stop there.

Yeung says: “This recent experience prompts that continuously improving catastrophe modelling capability is important to insurers in the South Asia region, yet it is not the only key to strong catastrophe risk management. Data quality is essential to credible catastrophe modelling output.

“Zonal and country aggregate exposures need to be frequently monitored. Insurers should also establish levels of acceptable exposure and aggregate limits as control measures.”

Reinsurers from neighbouring India are the best placed to exploit penetration in the region, particularly after facing minimal damage from the earthquakes. A.M. Best commented that the ratings of GIC of India, and Royal Insurance Corporation of Bhutan Limited, remain unchanged and that their net losses after reinsurance recovery are expected to be small relative to their capital and surplus.

With two of its largest earthquakes hitting in quick succession, Nepal’s appetite for reinsurance will be large, but Yeung believes Indian reinsurers operating in the region will be hesitant.

“Although demand for reinsurance protection in Nepal will increase, which may attract new reinsurers to enter into the market, existing reinsurers will likely take a cautious approach, given that the event is the worst in a century and property structures in Nepal are highly vulnerable to earthquake,” Yeung says.